05/07/2012

When the market is resting, like it did last week, I set up the alerts function that my broker provides to text my iPhone when the market moves either above or below the resting area. When I get the text message I look at the market to see if trading is warranted. In this case I was notified when the market made a move on Friday. I looked at the market chart on my iPhone, determined that no swing trades were warranted, because I was focused on longs and the market had moved down a bit. This process takes just a few minutes and can be done from almost anywhere; or with a brief break, in most any job. New traders often make this too hard, they want to watch the market all day, afraid they will miss something. Sending the alerts to a cell phone, for both stock triggers and key market levels, allows traders to work on other things and just take a look at the market when something interesting happens. If I am too busy to get to the computer I do not worry about it; any decent move does not require you to be in on the first day, almost by definition. All of my backtesting research for the trading tools I use, and the ones published in my books was done using end of day data; trades were entered at the open the day after the trigger. Again, this illustrates that one does not need to watch the market all day. In fact, it seems that the more people watch the market the worse they do. They start making emotional decisions rather than data based decisions. I am trading patterns in market environments in which they have demonstrated interesting results. There is no emotion in trading a pattern, it is either there or it is not. The stock has either moved above the trigger price, or it has not. The market is either in an appropriate environment for trading or it is not.

Trading should be data driven, not based on emotion, wishful thinking, or hot tips from TV hosts. To be data driven one needs to test and analyze trading tools and find out what really works, and when each tool should be used. Traders must understand which tool to use for a specific task, and have a clear understanding of how the tool works, and what can and cannot be done with it. I have extensively tested several trading systems, the results of this testing on specific trading trading tools are outlined in ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns. The testing process helps us understand how stocks usually behave after forming a specific pattern such as being outside the Bollinger Bands, showing strong distribution or accumulation, or pulling back or retracing during a trend. Understanding what a stock is most likely to do forms the beginning of a trading strategy. Trading without this information is taking unknown risks.

04/15/2012

Many traders use indicators to determine when to enter and exit trades. Most charting software includes dozens of different indicators that can be displayed on the charts. Popular indicators such as the Stochastic, and MACD, are frequently discussed when traders get together. I have listened to a number of these discussions, the interesting thing is that people typically explain why they use a particular indicator by citing an number of examples of when it has worked for them. When they do, another trader will typically say something like, ‘well it did not work for me, so I use the XYZ indicator which is much more reliable’. When I ask the second trader why his XYZ indicator is more reliable, the explanation usually involves a few more examples of good trades.

Examples do not prove anything. It is possible to flip a coin and have it come up heads five times in a row. Few traders would observe this and then think that when you flip a coin it always comes up heads. Yet for some reason people will read an article about an indicator that shows four or five examples of good trades it produced, and then they will go and risk their money trading the technique. They typically trade the new technique until it produces several losses in a row, and then they start looking for another article, that describes a ‘better’ technique, and the process repeats itself in an endless search for a better trading system.

Trading should be data driven, not based on emotion, wishful thinking, or hot tips from TV hosts. To be data driven one needs to test and analyze trading tools and find out what really works, and when each tool should be used. Traders must understand which tool to use for a specific task, and have a clear understanding of how the tool works, and what can and cannot be done with it. Traders need to extensively test several trading systems, and based on the results of that testing they develop a toolbox of different trading techniques that have shown effective results. They are not trading based on hunches they are using data driven techniques to defelop effective trading tools and understand the specific market environments in which they work. Data driven traders first check the current market conditions, and then pull out the tools that have shown interesting test results in those market environments. The testing process helps traders understand how stocks usually behave after forming a specific pattern. Understanding what a stock is most likely to do forms the beginning of a trading strategy. Trading without this information is taking unknown risks.

03/18/2012

New traders are often focused on what happens after they sell, or what happened to positions they did not take, or what happened if they would have ignored the the trading systems rules. This sort of focus develops bad habits that eventually cause problems. I want tools that are repeatable, I want tools that work more often than they fail, and then I just focus on using those tools in specific market environments where they have worked well. There is no technique that leads to profits on every trade. I have seen the adds for systems that work ’98% of the time’, but the guy selling them is the one making the money. Trading is a statistical business, and traders find tools that have a good percentage of success and use them in appropriate market conditions.

Traders make their money by testing and analyzing tools and techniques in order to learn what actually works, and what just sounds good but does not lead to profits. A few examples can be very misleading, traders test their potential trading tools over many different trades in different types of market conditions. Trading an untested system is taking unknown risks and often just churns the account. Extensive testing has led to several practical trading techniques based on the Bollinger Bands. I have found that in most cases I am ahead in the long run to avoid trading when the market is extended above the upper Band. As indicated by the testing data shared in ‘How to Take Money From the Markets’, it is generally best to not initiate new positions when the market is extended above the upper Band. You can also see from just glancing at a two year chart of the NASDAQ that when the market becomes extended above the upper Band it most often pulls back, or trades sideways, for a few days in order to get back below the band.

Trading should be data driven, not based on emotion, wishful thinking, or hot tips from TV hosts. To be data driven one needs to test and analyze trading tools and find out what really works, and when each tool should be used. Traders must understand which tool to use for a specific task, and have a clear understanding of how the tool works, and what can and cannot be done with it. I have extensively tested several trading systems, the results of this testing on specific trading trading tools are outlined in ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns. The testing process helps us understand how stocks usually behave after forming a specific pattern such as being outside the Bollinger Bands, showing strong distribution or accumulation, or pulling back or retracing during a trend. Understanding what a stock is most likely to do forms the beginning of a trading strategy. Trading without this information is taking unknown risks.

03/11/2012

Trading is about risk management. In order to understand what the risks are traders need to understand exactly how and when their trading patterns work. Testing different tools, and understanding how each trading tool performs in different market conditions, is one way to get a clearer picture of what is an effective trading tool and how to use it.

Identifying and developing trading systems with an edge is a lot of work. Making the trades is the easy part. Too many traders skip the analysis part and end up losing money because they have not put in the effort to develop trading tools that provide an edge. Trading some technique without having carefully tested and analyzed it generally leads to disappointment. The traders job is not to focus on making trades, but instead to focus on what types of patterns should be traded; and in which types of market conditions each trading tool works best.

Trading should be data driven, not based on emotion, wishful thinking, or hot tips from TV hosts. To be data driven one needs to test and analyze trading tools and find out what really works, and when each tool should be used. Traders must understand which tool to use for a specific task, and have a clear understanding of how the tool works, and what can and cannot be done with it. I have extensively tested several trading systems, the results of this testing on specific trading trading tools are outlined in ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns. The testing process helps us understand how stocks usually behave after forming a specific pattern such as being outside the Bollinger Bands, showing strong distribution or accumulation, or pulling back or retracing during a trend. Understanding what a stock is most likely to do forms the beginning of a trading strategy. Trading without this information is taking unknown risks.

02/20/2012

I frequently get emails from new traders wondering how to get the time to ‘watch their trades all day’. This is generally not necessary for swing trading, and in fact may lead to over trading and poor decision making. All of the testing I have done is based on end of day data, with entries being done at the open the day following the pattern trigger, and a number of trading systems show interesting results using this approach. The patterns discussed in my two books were tested on end of day data, and did not require any monitoring of positions during the day. I am trading patterns, not hunches or the latest ‘expert opinion’ on CNBC. I used to have CNBC on most of the time, but I found my trading improved when I turned it off and focused on the trading patterns and the market conditions rather than ‘news’, press releases, ‘experts’, and so on.

Each pattern either works or it doesn’t. The idea is to find patterns with a statistical edge, then trade them in appropriate market conditions using appropriate money management techniques. There is no way to know if any particular trade will be profitable, there are no magic indicators or secret techniques that tell you if a specific trade will work. Each trade has a certain probability of working, some will work and some will not. Trading is a statistical business where I want to know the odds of a particular pattern working in a particular market condition, and then use this information to be positioned to profit if the market or the stock follows the most likely path. To do otherwise makes little sense.

Trading should be data driven, not based on emotion, whishful thinking, or hot tips from TV hosts. To be data driven one needs to test and analyze trading tools and find out what really works, and when each tool should be used. Traders must understand which tool to use for a specific task, and have a clear understanding of how the tool works, and what can and cannot be done with it. I have extensively tested several trading systems, the results of this testing on specific trading trading tools are outlined in ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns. The testing process helps us understand how stocks usually behave after forming a specific pattern such as being outside the Bollinger Bands, showing strong distribution or accumulation, or pulling back or retracing during a trend. Understanding what a stock is most likely to do forms the beginning of a trading strategy. Trading without this information is taking unknown risks.

02/12/2012

When the market breaks out of a basing pattern, as it did last week, it makes it easier for strong stocks to run. When the market is basing, most stocks tend to run a bit, then reverse. When the market breaks out more stocks tend to move above their trigger points and they tend to run longer. I always want to be adapting my position sizing, and the number of trading positions I am using, to the current market conditions. When the market is in a basing pattern I use smaller than normal position sizes and trade fewer positions. After the market breaks out of a base I am willing to use larger position sizes and trade more of them. Using smaller position sizes during more risky market environments helps preserve previous profits.

We saw nice moves in a number of the swing trading setups from the last Letter including AAPL, AAP, TSCO, ULTA, PVX, VOXX, and AWK. Most of the setups rose above their trigger points and kept moving up into their next resistance areas, thus providing nice profitable moves. I followed the standard prioritization process outlined in previous Letters for selecting the trades I wanted to enter. I took profits on trades as they approached their upper Bollinger Band. The market is moving and so are our setups, nice week.

As noted in previous Letters one of the the sweet spots for holding swing trades is three to five days. A number of systems show interesting results just using a time stop and exiting after three to five days. The rule I use is to have a good reason to hold after three days. When the market is bullish there are often good reasons to hold such as more room to run to the next resistance area, not very extended above the fifty day moving average, moving on strong volume, etc. If its is not clear that there is a good reason to hold, then I happily take profits and move on to the next pattern that is breaking out and just starting its run. I am not trying to hold on for the last dime in every position, there is no way to do that consistently. I am trading patterns, not stocks. When a setup moves and becomes extended I would rather ride a fresh horse than one that has been running for awhile and may be tired.

AAPL moved above its trigger point during Monday’s session and ran up every day last week, gaining thirty five points. I picked up the AAPL trade on Monday and let it run during the sessions on Monday, Tuesday, and Wednesday. On Thursday AAPL moved above the upper Bollinger Band which is generally a sell signal. The reason for this can be found in the research outlined in ‘How to Take Money From the Markets’. My research indicates that one can develop an interesting system for shorting strong moves above the upper Bollinger Band. This also implies that if I am long and a position moves above the upper Band I should consider taking profits. I have extensively tested several trading systems, the results of this testing on specific trading trading tools are outlined in ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns. The testing process helps us understand how stocks usually behave after forming a specific pattern such as being outside the Bollinger Bands, showing strong distribution or accumulation, or pulling back or retracing during a trend.

02/08/2012

A number of traders use chart indicators to determine when to enter and exit trades. Most charting programs include dozens of different indicators that can be displayed on the charts. Popular indicators such as the Stochastic, and MACD, are frequently discussed when traders get together. I have listened to a number of these discussions, the interesting thing is that people typically explain why they use a particular indicator by citing an number of examples of when it has worked for them. When they do, another trader will typically say something like, ‘well it did not work for me, so I use the XYZ indicator which is much more reliable’. When I ask the second trader why his XYZ indicator is more reliable, the explanation usually involves a few more examples of good trades.

Examples do not prove anything. It is possible to flip a coin and have it come up heads five times in a row. Few traders would observe this and then think that when you flip a coin it always comes up heads. Yet for some reason people will read an article about an indicator that shows four or five examples of good trades it produced, and then they will go and risk their money trading the technique. They typically trade the new technique until it produces several losses in a row, and then they start looking for another article that describes a ‘better’ technique, and the process repeats itself in an endless search for a better trading system.

Adopting a trading technique because it was recommended by someone, or written about in an article that showed a few working examples, is a high risk endeavor. Trading is a statistical business. Traders need to understand how a potential system has performed over hundreds, or thousands, of trades. If you flip a coin three times there is a one in eight chance of it coming up heads three times in a row. If you observed this example and drew conclusions about the probability of heads coming up you would be wrong, just like seeing three examples of when an indicator produced favorable results could also be wrong.

Trading should be data driven, not based on emotion, whishful thinking, or hot tips from TV hosts. To be data driven one needs to test and analyze trading tools and find out what really works, and when each tool should be used. Traders must understand which tool to use for a specific task, and have a clear understanding of how the tool works, and what can and cannot be done with it. I have extensively tested several trading systems, the results of this testing on specific trading trading tools are outlined in ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns. The testing process helps us understand how stocks usually behave after forming a specific pattern such as being outside the Bollinger Bands, showing strong distribution or accumulation, or pulling back or retracing during a trend. Understanding what a stock is most likely to do forms the beginning of a trading strategy. Trading without this information is taking unknown risks.

01/16/2012

Analyzing trading patterns is vitally important to trading. Trading without understanding the statistics of a trading pattern is just taking unknown risks, and makes little sense. The trading patterns tested and analyzed in my first two books provide the beginnings of a trading toolbox, and the knowledge of when to use each tool. Without a clear understanding of how and when different trading patterns work, it’s easy to get caught up in fear, greed, group think, etc. However these emotional and non-data driven approaches often lead to losses. Traders need to be first and foremost focused on what the market is doing, and then selecting the most appropriate trading patterns, or remaining in cash, to address the current market conditions. Without previous testing and analysis of trading tools, and how they perform in differrent market conditions, traders are just randomly using tools that may or may not be appropriate for the current market.

It is also very important to have a clear exit strategy before entering any trade. If I don’t know where I want to exit a trade then I don’t take the trade in 1st place. In trading range markets most stocks tend to pop and drop, if they didn’t the market (which is the summation the large number of stocks ) would be trending. So a trading range environment tells us that stocks are not going to run very far, by definition. I use this information to drive my exit strategy which is more short term in a trading range market then it is a trending market as outlined below. In a trending market, individual stocks tend to pop and then move for a while. The market, the summation of a large number of stocks, is moving or trending because a lot of individual stocks are moving or trending. Once again observing the market conditions tells us how individual stocks are likely to behave, and that tells us how to manage our exit strategies.

Trading should be data driven, not based on emotion, whishful thinking, or hot tips from TV hosts. To be data driven one needs to test and analyze trading tools and find out what really works, and when each tool should be used. Traders must understand which tool to use for a specific task, and have a clear understanding of how the tool works, and what can and cannot be done with it. I have extensively tested several trading systems, the results of this testing on specific trading trading tools are outlined in ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns. The testing process helps us understand how stocks usually behave after forming a specific pattern such as being outside the Bollinger Bands, showing strong distribution or accumulation, or pulling back or retracing during a trend. Understanding what a stock is most likely to do forms the beginning of a trading strategy. Trading without this information is taking unknown risks.

11/20/2011

I went to the Traders Expo in Las Vegas last week. While walking the floor of the show and talking to traders, I was amazed at the number of people who were looking for a new trading technique because the one they were using was ‘not producing results’ during the last few weeks. There were a lot of slick presentations on trading, but few contained any real data indicating how the system actually performed, or how the results varied by market condition. Trading a tool based on just a few examples is a good way to drain an account. Most of these people only had one trading tool, either focused on stocks or ETFs, and did not trade both. They had no idea how their trading tool performed in different market conditions. They had no idea of how to adapt to the market conditions instead of complaining about them.

Trading the same tool constantly in all market conditions is a good way to drain an account. Moving blindly from one tool to another is also a good way to drain an account. Since stock and ETF trades often work in different timeframes; I have found that trading both is an advantage to me, and lets me participate in both short term and intermediate term movements. Understanding the current market conditions and having that information drive the selection of trading tools, number of positions traded, and position sizing, is one of the keys to success. It takes some time and effort to learn this. The ‘traders’ that are looking for a simple indicator or magic tool that will lead them to riches are asking for trouble.

There are no magic tools. If there were tools that required no effort to learn, and always worked, then everyone would be rich. Trading, like other professions, requires some time, effort, and expense, in order to develop the skills. None of the people complaining about the recent market environment had used that information to adjust their trading styles. In my case, I have been standing aside for a couple weeks as the market has shown unusual volatility in a tight trading range. Both of those conditions are caution signs, and together indicate it is best to sit tight and focus on protecting previous profits until the market picks a direction; which it will when it is ready. None of the people complaining about the market environment and the results of their trading were sitting tight (as the recent conditions called for). They felt that since they were traders they should be trading. When I suggested they should be focused on generating profits, not trades, and the recent environment had the odds stacked against them they were very quiet except for a couple that argued they had to be trading in order to have the opportunity to make profits. I quoted a Kenny Rogers song and told them that successful traders need to ‘know when to hold them and know when to fold them’. Sometimes the best, and most profitable, strategy is to stand aside for a week or so and let the market sort itself out. Traders need to have studied their trading tools and market conditions to know which tool is most likely to be appropriate for the current market conditions.

Trading should be data driven, not based on emotion, whishful thinking, or hot tips from TV hosts. To be data driven one needs to test and analyze trading tools and find out what really works, and when each tool should be used. Traders must understand which tool to use for a specific task, and have a clear understanding of how the tool works, and what can and cannot be done with it. I have extensively tested several trading systems, the results of this testing on specific trading trading tools are outlined in ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns. The testing process helps us understand how stocks usually behave after forming a specific pattern such as being outside the Bollinger Bands, showing strong distribution or accumulation, or pulling back or retracing during a trend. Understanding what a stock is most likely to do forms the beginning of a trading strategy. Trading without this information is taking unknown risks.

09/12/2011

Serious traders will go through a learning curve as they study market behavior and how their trading systems function. They will have times when they run into situations that have not been experienced or researched and they may be unsure of what to do. This is normal, it is the price of admission to the trading business. My general rule is that when I am unsure I close the position. It is hard to go broke taking profits so my focus is on needing a clear reason to stay in a position, not wondering whether or not I should get out. If there is no clear reason to hold I take profits and move on to another trade.

When trading I am not holding out for the perfect trade, there is no such thing. Trading is about managing risks and I use the current market conditions to determine how many trades to be taking and the appropriate position sizing to use. Setups with more room to run are prioritized above ones with little room to run. Setups triggering on stronger volume compared to the previous days volume are prioritized above ones with lower trigger day volume. Setups with shallower pullbacks are prioritized above ones with deeper pullbacks. I then look at the setups that are triggering and start from the top of the prioritized list and work down until I run out of setups or fill the number of positions I am interested in.

The successful trader has a tool box with a variety of trading tools for use in different market conditions. The trader, like the carpenter, must go beyond just acquiring the tools. Traders must understand which tool to use for a specific task, and have a clear understanding of how the tool works, and what can and cannot be done with it. I have extensively tested several trading systems, the results of this testing on specific trading trading tools are outlined in ‘How to Take Money from the Markets’, and Money-Making Candlestick Patterns. The testing process helps us understand how stocks usually behave after forming a specific pattern such as being outside the Bollinger Bands, showing strong distribution or accumulation, or pulling back or retracing during a trend. Understanding what a stock is most likely to do forms the beginning of a trading strategy. Trading without this information is taking unknown risks.